June 19, 2023

Loans or Deposits from Members or Shareholders | Companies Act, 2013- Part-2

Apart from Loans from Banks and NBFCs, companies do have options to borrow funds from shareholders or members. However, since funds are involved of the shareholders, therefore, company law contains detailed provisions related to loans and deposits from Member or shareholders. Companies are required to follow detailed procedure to obtain deposits and also are required to repay the same within committed time.

Part-1 of this article can be read here.

In continuation of last article, following are the additional provisions and rules applicable on borrowing from Members or shareholders:

1. Security Against Charge in case of Secured Deposits

In case of secured deposit, every company shall provide for security by way of a charge on its assets excluding intangible assets of the company.
Such charge is created for the due repayment of the amount of deposit and interest thereon.
Amount of charge shall not be less than the amount remaining unsecured by the deposit insurance.
Amount of deposit and interest thereon shall not exceed the market value of such assets as assessed by a registered valuer.
The Company shall ensure that amount of security deposit and value of Deposit insurance is not less than amount of deposit and interest thereon.

2. Trustees for Secured Deposits

a. Appointment of Trustee for Depositors

In case the company is inviting secured deposits, the company shall appoint one or more trustees for creating security for deposits.
Such trustees shall be appointed prior to issuance of circular or Advertisement for inviting deposits.
Prior written consent is required to be obtained from trustee prior to their appointment.
Trust deed shall be executed in Form DPT-2 at least 7 days prior to issuing the circular or advertisement.

b. Persons can’t be appointed as Trustees

As per Rule 7(3) of The Companies (Acceptance of Deposits) Rules, following person can’t be appointed as trustee including a company that is in the business of providing trusteeship services, if the proposed trustee –
- is a director, key managerial personnel or any other officer or an employee of the company or of its holding, subsidiary or associate company or a depositor in the company;
- is indebted to the company, or its subsidiary or its holding or associate company or a subsidiary of such holding company;
- has any material pecuniary relationship with the company;
- has entered into any guarantee arrangement in respect of principal debts secured by the deposits or interest thereon;
- is related to any person specified in clause (a) above

c. Removal of Trustee

No trustee shall be removed after the issue of circular or advertisement and before the expiry of his term.
However, he can be removed with the consent of all the directors present at a meeting of the board.
Provided that in case the company is required to have independent directors, at least one independent director shall be present in such meeting of the Board.

d. Duties of Trustees

Every person appointed as trustee for secured deposit is required to fulfill following duties:

Ensure that the assets against which charge is created alongwith amount of deposit insurance is sufficent to cover the repayment of the principal amount of secured deposit and interest thereon.
Get Satisfied that circular or advertisement inviting deposits does not contain any information which is against the provisions of the Act;
ensure that the company does not commit any breach of covenants and provisions of the trust deed;
Take reasonable steps in case of any breach of covenants of the trust deed;
Call meetings of deposits as and when required.
Supervise the implementation of the conditions regarding creation of security for deposits and the terms of deposit insurance;
Take necessary actions in case security becomes enforceable;
Take necessary actions for protection of interest of depositors and to resolve their grievances.

e. Meeting of Depositors

The trustee shall call a meeting of all the depositors on-

Receipt of request signed by atleast 1/10th of depositors in value for the time being outstanding;
Happening of any event which is a default and which may affect the interest of depositors in opinion of trustee.

3. Register of Depositors

Every company accepting deposits shall maintain a registered at its registered office wherein following information shall be entered of each depositor;
- name, address and PAN of the depositors;
- particulars of guardian, in case of a minor;
- particulars of the nominee;
- Deposit receipt number;
- date and the amount of each deposit;
- duration of the deposit and the date on which each deposit is repayable;
- Rate of Interest
- due date for payment of interest;
- Instructions for payment of interest and for non-deduction of TDS, if any;
- date or dates on which the payment of interest shall be made;
- particulars of security or charge created for repayment of deposits;

Information in the register of deposits shall be updated within 7 days from the date of issuance of the receipt;
Such a register is required to be maintained for atleast 8 years from the financial year in which the latest entry is made in the register.

4. Annual return

Every company to which these rules apply is required to file annual return in Form DPT-3 on or before the 30th June of every year with Registrar of Company.
Such return shall be filed in Form DPT-3 alongwith Fee.
Such form shall contain the information as on the 31st day of March of that year duly audited by the auditor of the company and declaration to that effect shall be submitted by the auditor.

5. Disclosure in Financial Statement

Every company, other than a private company, shall disclose the amount received from directors in its financial statement.
Every private company shall disclose the amount received from directors and relatives of directors in the financial statement.

6. Consequences of Non-compliance

Penal Interest Delay in repayment of Deposits

As per Rule 17 of The Companies (Acceptance of Deposit) Rules, in case matured and claimed deposits remain unpaid then the company shall pay a penal interest of 18% p.a. for overdue period.

Application to Tribunal

Where a company fails to repay the deposits or interest thereon then depositor may apply to the Tribunal for directing the company to pay the sum due or for any loss or damage incurred by depositor due to such non-repayment.

Damages for Fraud

If deposits have been accepted with intent to defraud the depositors or for any fraudulent purpose then every officer of the company who was responsible for the acceptance of such deposit shall be personally responsible, without any limitation of liability, for losses or damages incurred by depositors.
Further, any suit or proceedings may be taken by such person or group of persons who has incurred loss as a result of the failure of the company to repay the deposits.

Penalty for Non-compliances

If any company accepts or invites any deposits in contravention of provisions of Companies Act or if a company fails to repay the deposit or interest therein within specified period then:
- In addition to the amount of deposit and interest therein, the company shall be punishable with fine which shall be lower of Twice the amount of deposit accepted or INR 1 Crores. Further, such Fine may extend upto INR 10 Crores
Also, every officer in default shall be punishable with imprisonment which may extend to 7 years and within not less than INR 25 Lacs and upto INR 2 Crores.

Further, If any company or any other person contravenes any provision of these rules for which no specific punishment is provided, the company and every officer in default shall be punishable with fine which may extend to INR 5,000. In case of continuing contravention, additional fine upto INR 500 per date after the first day during which the contravention continues shall be levied.

7. Other Provisions

a. Alteration of Terms of Deposits

As per Rule 3(7) of The Companies (Acceptance of Deposit) Rules, a company can’t reverse right to itself to alter the terms of deposits, to prejudice or disadvantage of the depositor.

b. No deposits can be made out of borrowed funds

No deposit can be accepts or renewed unless a declaration is received from depositor that such deposit is not made out of money borrowed by him from any other person

c. Issuance of Depository Receipt to Depositor

Upon acceptance or newel of deposit, every company shall issue to the depositor a receipt for the amount received by the company.
Such receipt should be issued within 21 days from the date of receipt of money or realisation of cheque or date of renewal.
Such receipt shall contain:
- the date of deposit;
- Name and address of the Depositor
- Amount received as deposits;
- Rate of Interest and
- the date on which the deposit is repayable.

DISCLAIMER: The views expressed are strictly of the author and VJM & Associates LLP. The contents of this article are solely for informational purpose. It does not constitute professional advice or recommendation of firm. Neither the author nor firm and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon.

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